Abercrombie & Fitch's Upside Surprise

The winter was not just bad for teen-fashion retailers... it was downright disastrous. On one hand, weather, among other industrywide factors, contributed to a sharp drop in mall traffic, eating into the top line. On the other hand, a brutal pricing war put enormous pressure on the bottom line, as retailers tried to out-discount each other throughout the period.

Now, it seems that the industry is recovering a bit, as Abercrombie & Fitch (NYSE: ANF  ) delivered a big earnings beat last week. Could the industry be turning around?

Changing channels
While the report was something of a mixed bag, it sent shares on a powerful relief rally of more than 11% on the day. Fourth-quarter earnings per share came in at $1.34, smashing the $1.05 consensus estimate. Full-year earnings also beat the Street, coming in at $1.91 versus a consensus of around $1.61. Clearly, the bottom line is doing better than feared over at Abercrombie & Fitch.

However, it was not all good news. For one thing, Q4 profit was down substantially year over year, sinking some 58%. Revenue missed expectations, sliding 12% to $1.3 billion and missing expectations of nearly $1.4 billion. Same-store sales didn't do much better, dipping 8% year over year.

In the report, management announced an accelerated share-buyback program of around $150 million for the first quarter. Looking further ahead, the company expects to earn between $2.15 and $2.35 per share for the full year on a high-single-digit decrease in same-store sales .

Faced with declining store traffic in its brick-and-mortar business, the company is now turning to other channels in order to prop up sales growth. It is increasingly focusing on its outlet stores, now making products specifically for this channel. Additionally, it is looking to expand its international business as sales slow in the U.S. Sixteen international stores are expected to open this year, while 70 U.S. locations will be shuttered.

In with the cool crowd?
A&F seems to be losing market share to competitors such as Urban Outfitters (NASDAQ: URBN  ) and a newly fashionable Gap (NYSE: GPS  )  and is perhaps no longer considered part of the cool crowd by teen consumers. The company's full-year and fourth-quarter results came in shy of Wall Street's expectations but still showed some decent growth, with holiday season sales up 8% year over year and net sales up 10% for the full year. The company's Free People business is still growing quickly; comp-retail net sales were up 20%.

Gap also looks good going into earnings. The resurgent retailer is expected to keep up its solid performance for the fourth quarter, having posted comp-store sales increases of 2%, 5%, and 1% for the first three fiscal quarters of the year, respectively. Gap has been successfully bucking the slump in U.S. fashion retail for some time now, in part due to its appealing product offerings and solid image. Fourth-quarter guidance of $0.65-$0.66 was considerably higher than the $0.60 consensus, and these will probably be the numbers to watch.

The bottom line
The teen-fashion retail industry is showing some signs of recovery after a dreadful winter, which lowered already-depressed levels of store traffic and a brutal discounting environment. Abercrombie & Fitch, while reporting lower earnings and revenue, easily beat analyst expectations, indicating that the current slump isn't as bad as feared. Still, the company is facing stiff competition from rivals such as Gap and Urban Outfitters and may have to struggle to regain its image with younger consumers.

Are fashion retailers a top pick for this year?
The Motley Fool's chief investment officer has selected his No. 1 stock for 2014, and it's one of those stocks that could make you rich. You can find out which stock it is in the special free report "The Motley Fool's Top Stock for 2014." Just click here to access the report and find out the name of this under-the-radar company.


Read/Post Comments (0) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2861647, ~/Articles/ArticleHandler.aspx, 9/19/2014 6:15:34 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement